Do you need life insurance for a mortgage?

The short answer is no. Life insurance is not compulsory when you borrow to buy a property. However, it’s definitely something you should consider.

In this article we look at the type of insurance you definitely need to get a mortgage, why life insurance could also be a good idea and some alternatives that might suit you better.

What insurance do you need to get a mortgage?

To get a mortgage, you must have house insurance in place before you can draw down the loan to pay for your new home. Here’s why:

  • When you borrow to buy a house, the lender’s mortgage is registered on the property’s title, along with your name as the owner. This allows the lender to sell your home as a last resort, if you can’t keep up the mortgage repayments. It’s called a ‘mortgagee sale’. After the lender sells your house, they keep what you owe them and give you anything that’s left over. This is how they protect the money they’ve lent to you. Your house is known as the ‘security’ for the loan.
  • If anything happened to your home, like a fire or significant damage, it would immediately decrease in value. It could now be worth less than what you owe the lender. That’s not a risk they’re prepared to take, so they require you to have house insurance from day one. The amount it’s insured for will need to cover the cost of a complete re-build, including any demolition and material removal before the rebuild begins. But that’s usually less than the purchase price, which includes the land value.

It’s important to start arranging your house insurance as soon as possible. In fact you should check the house is insurable before you agree to buy it. For an older home, for example, the insurer may require an electrical inspection to see if it has been rewired. You don’t want to be still sorting the insurance on the day you’re meant to draw down the loan to pay for your new home.

Why is life insurance worth considering when you get a mortgage?

There are several types of life insurance. The one most people think of first is called life cover. If you die while you have life cover, the insurer will pay an agreed lump sum to your estate or the beneficiaries named in your policy. Some policies will also pay out if you’re diagnosed with a terminal illness and not expected to live for more than 12 months.

Having life cover means the people who rely on you for financial support will be looked after if you’re no longer here. At the very least, you might get enough cover to repay your mortgage, so that your surviving partner or family won’t have the burden of mortgage repayments for years to come.

What are the life insurance alternatives when you have a mortgage?

If you’re considering insurance to cover your mortgage, there are several types of life insurance to consider beyond life cover. Here are the main options:

  • Mortgage repayment insurance – If you can’t work due to an injury or illness, this gives you a monthly payment for an agreed period or until you’ve recovered and are earning again. Typically, the payments can be something like up to 40% of your income before tax or up to 110% of your usual monthly mortgage repayments. The higher the payments and the longer the chosen pay-out period, the higher your insurance premiums will be. You can normally spend the monthly payments on whatever you like, not just your mortgage.
  • Income protection cover – This is very similar to mortgage repayment insurance, except the maximum amount of cover you can choose is usually much higher. It might be something like up to 70% of your normal income. This could suit you more if you have a family or want to cover more than just your mortgage repayments.
  • Survivor’s income cover – This is like life cover, but instead of a one-off lump sum it pays an agreed monthly amount for an agreed period of time.
  • Trauma cover – This pays an agreed lump sum if you suffer from one of the many conditions mentioned in the policy. They’re usually more serious conditions, like cancer, heart attack, stroke, loss of limbs or loss of sight. You don’t have to be unable to work or permanently disabled.
  • Total and permanent disability (TPD) cover – This pays a lump sum if an accident or illness means you’re unable to work again. The premiums are usually lower than for trauma cover, because the qualifying conditions for TPD cover are more limited.

Next steps

Whether you’re looking for a good deal on house insurance or considering the best type of life insurance for your needs, it pays to shop around. It’s usually a good idea to talk to an independent financial adviser or insurance broker. A good broker will represent most of the main insurance companies. Their experience and market knowledge can help you to understand suitable options and choose the right policy for your needs at a competitive price.

To help you prepare for your first meeting, see our handy articles and complete guides to:

DISCLAIMER: The information contained in this article is general in nature. While facts have been checked, the article does not constitute an insurance advice service. It is only intended to provide education about the New Zealand insurances sector. Nothing in this article constitutes a recommendation that any type of insurance cover is suitable for any specific person. We cannot assess anything about your personal circumstances, all of which are unique to you. Before making insurance decisions, we recommend you seek assistance from an insurance adviser or expert.

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